Telecom CEO · Islamabad, Islamabad · Member since 2013 · 5 posts · 1 vote
Hello
As you would have guessed by the subject, I am not a US citizen. I would like to invest in the RE sector of the US economy but all the research that I have read on the internet points to foreigners paying a significantly higher percent of tax on rental property income than locals (30% withholding tax on Gross Income vs 15% on Net Income).
I am not concerned about the benefits of a foreign corporation owing a US LLC and thereby not paying estate tax. I need to know what structure and what business model a foreigner has to adopt to be accepted by the IRS for purposes of paying similar tax as residents on rental income and property flipping.
I would like to thank you for your time for having read my request!
You are correct that as a general rule you are subject to a 30% withholding based on gross rents. But you can avoid this treatment. First, a little background...
Nonresident aliens are taxed based on the source of their income and whether or not their income is effectively connected with a US trade or business. A nonresident alien’s income that is subject to US income tax must be divided into two categories:
1.Income that is effectively connected with a trade or business in the US, and
2.Income that is not effectively connected with a trade or business in the US.
The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate and does not allow any deduction for expenses. Rental real estate is defined as income that is not effectively connected income and, therefore, would be subject to the 30% withholding.
However, if you have rental real estate you can elect to have it treated as a US trade or business for tax purposes. If you make this choice, you can claim deductions attributable to the real property income and only your net income from real property is taxed. The choice applies to all income from real property located in the United States and held for the production of income and to all income from any interest in such property. If you make this election, you must attach a statement to your tax return.
Each foreign investor situation is different. Make sure that you engage a qualified CPA who understands the tax issues you are facing.
Disclaimer: You're asking for legal advice so I feel compelled to say that I am not giving legal or tax advice.
We don't pay 15% on rental income, it's taxed at the respective taxpayer's ordinary income level. Where 15% comes into play is on Capital gains, which is also changing in 2014.
I've spoken with foreign investors wishing to invest in multifamily deals. From what I understand, the 30% is simply a fact of life unless your country has a tax treaty with the US (Uganda does not) or you are "effectively connected with a US trade or business."
This is not an area that I know anything about but would suggest contacting a tax accountant. The idea of paying taxes on gross income as opposed to net just seems wrong so there must be some misunderstanding.
Hello
As you would have guessed by the subject, I am not a US citizen. I would like to invest in the RE sector of the US economy but all the research that I have read on the internet points to foreigners paying a significantly higher percent of tax on rental property income than locals (30% withholding tax on Gross Income vs 15% on Net Income).
I am not concerned about the benefits of a foreign corporation owing a US LLC and thereby not paying estate tax. I need to know what structure and what business model a foreigner has to adopt to be accepted by the IRS for purposes of paying similar tax as residents on rental income and property flipping.
I would like to thank you for your time for having read my request!
I hate to be the bearer of bad news, but there is not much of a choice. Short of you acquiring a green card or residing here, there is nothing you can do>
The 30% withholding tax is simple to be taken from the gross rents, it is refundable up to the actual amount of tax.
*For foreign non US residents*
It is recommend that you hold it in a corporation. That corporation would own the real estate and lease it out. It would collect the income and pay the expenses. and pay tax on its net income. 15% on the first 50k of annual income. 25% on the next 25k and essentially 34% after that. You would then be subject to US tax on the dividends paid from the corp.
As a non-resident holding personally, you would be looking at 33+% on net income anyway.
@Steven Hamilton II I am curious how foreign investors are taxed as a passive investor in a syndicated deal. I am assuming that they came in as a US entity such as an LLC.
@Steven Hamilton II is spot on. My {non real-estate} company has been doing business in the U.S.A for years and we have just begun pursuit of rental properties in select U.S.A. markets. We pay taxes on out income in the U.S.A. at the elevated rate. We also get the pleasure of paying taxes on this income again at the even higher Canadian rate. Finally, do to a tax treaty between Canada and the U.S.A. we get a credit for {much of} the tax paid to the IRS.
It's just the cost of doing business ... you need to account for it in any deals you make.
@Roy N. Can you clarify how this would affect a Canadian as described below. The passive investor would be a fractional owner.
I am curious how foreign investors are taxed as a passive investor in a syndicated deal. I am assuming that they would come into the deal as a US entity such as an LLC.
I have not had any foreign investors in our deal as of yet, but expect that will happen soon.
How the withholding tax would be applied to the fractional ownership syndication deal, I cannot say as I have not participated in one. It would be a question appropriate for @Steven Hamilton II .
Withholding is applied to other sorts of earned income {passive and active} and dividend income, so it would be expectation that a foreigner participating in a syndication will have the withholding applied to whatever income is attributable to her/him.
Again, Steven would be the person to answer your question.
@Roy N. I do know that a foreign entity coming into one of our deals would have to have 30% of their distribution held for the IRS or we would be liable for it. This would not be the case if they came in as a US entity which is what we would require.
Suggest talk to tax attorney who expert in real estate. I received good results from a Nevada Corp NCH , recently spoke to David Vanlandingham, capp, cwps and he mention he has foreign clientele, worth a try.
I've worked with quite a few international investors buying in the US and the absolute best sure-fire way to avoid unnecessary taxation is to have a professional setup your entity and tax setups. Someone who specializes in international buyers. There are certain things you need set up just right in order to avoid major tax penalties, such as the 30%. None of it is hard, but it has to be done right before you buy a property. People's advice on here is good, but don't do anything on your own. Pay the professional. Because if anything gets messed up, you're stuck with it.
Thank you for your posts. Much appreciated! I was going to contact a tax accountant and real estate lawyer specialising in dealing with foreigners but just wanted to see if there was some more practical information I could get my hands on.
@Steven Hamilton II I am curious how foreign investors are taxed as a passive investor in a syndicated deal. I am assuming that they came in as a US entity such as an LLC.
They are taxed as a nonresident Alien, which is not exactly favorable, but it is the way it is. You will pay tax here in the US and then you will pay tax on the difference to Canada.
How the withholding tax would be applied to the fractional ownership syndication deal, I cannot say as I have not participated in one. It would be a question appropriate for @Steven Hamilton II .
Withholding is applied to other sorts of earned income {passive and active} and dividend income, so it would be expectation that a foreigner participating in a syndication will have the withholding applied to whatever income is attributable to her/him.
Again, Steven would be the person to answer your question.
Yes, it would not be favorable. The syndicate would have to withhold 30% and possibly more in withholding from their payments. This would not affect the other members. It is possible that the entity is already subject to state withholding for those that are not residents of it's home state.
You are correct that as a general rule you are subject to a 30% withholding based on gross rents. But you can avoid this treatment. First, a little background...
Nonresident aliens are taxed based on the source of their income and whether or not their income is effectively connected with a US trade or business. A nonresident alien’s income that is subject to US income tax must be divided into two categories:
1.Income that is effectively connected with a trade or business in the US, and
2.Income that is not effectively connected with a trade or business in the US.
The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate and does not allow any deduction for expenses. Rental real estate is defined as income that is not effectively connected income and, therefore, would be subject to the 30% withholding.
However, if you have rental real estate you can elect to have it treated as a US trade or business for tax purposes. If you make this choice, you can claim deductions attributable to the real property income and only your net income from real property is taxed. The choice applies to all income from real property located in the United States and held for the production of income and to all income from any interest in such property. If you make this election, you must attach a statement to your tax return.
Each foreign investor situation is different. Make sure that you engage a qualified CPA who understands the tax issues you are facing.